Earnings calls barely have anything to do with earnings. The numbers are released the day before the call, along with a summary of how management got there and a (usually charitable) description of their significance. By the time the line goes hot, the numbers are public knowledge, and everyone listening in has read them. Buy-side analysts aren’t tuning in on call day to hear the numbers, they’re tuning in to hear management read them. It’s an opportunity for analysts to hear management’s process, their outlook, their methods, and their presentation.
Perspective on Earnings
The human participants that make markets what they are use the call to build a very human perception and familiarity with the people in charge of companies. This important impression will be the one through which future news and material events will be filtered. It’s crucial to prepare for your earnings call with absolute precision in mind. That means, ensuring the sound quality of the call and thinking about your earnings call marketing in advance. As the company goes through periods of prosperity, has setbacks, and even faces times of crisis, it is the people who analysts and investors heard – and became familiar with – on the earnings calls who will be navigating the company.
The earnings press release provides a great jumping off point to make your earnings call stand out. A detailed description of the EPS numbers and the quarter’s activities read with familiarity and authority re-enforces the fact that the company knows its business. Too often, the presenter on the call is reading from a prepared statement that they’ve spent several weeks putting together. They’re tired of it and it shows. This isn’t a good look and, since it has to be done it’s best to get it over with quickly – or early.
1. Reduce the focus on prepared remarks by releasing them early
Some companies are releasing the audio of their prepared remarks the day before the call, with the earnings release. This gets the preamble out of the way early, and allows for more questions at call time. It makes for a more engaging call, giving listeners less opportunity to tune out. It also tends to lead to more intelligent and interested questions as callers have more time to formulate them. If you want your earnings call to matter, this is a great start.
2. Give analysts more time to formulate questions
When we first started working in this industry, one thing we found particularly interesting is the role of financial analysts in positioning your company’s story. To a large extent, their questions dictate the quality of your quarterly earnings call. You can’t necessarily decide how analysts listen to earnings calls, but you can play a role in how they formulate their questions. Giving analysts more time to contemplate their questions generally lends itself to more intelligent questions. It presents well when your management team answers unknown questions with color and enthusiasm, but it’s painful to listen to an analyst trying to formulate a useful question on the fly.
But can you blame them? They’re given 10 minutes to analyze your prepared remarks (and other questions) and then drive the conversation in a useful direction. Is it any wonder that a huge number of questions start with the phrase “you’ve already covered this in your prepared remarks, but…”? Releasing your management team’s prepared remarks in advance eliminates this as a concern. Instead, you’ll have an analyst asking a well-researched question with close-to-perfect phrasing. Given that we spend so much time scripting and refining prepared remarks, we should have the same consideration of analysts and the role they’ll play when we’re looking to improve earnings call quality.
3. Diversify your question sources
The most innovative earnings call is one that pushes boundaries in a smart and well thought-out way. We’ve already talked about how important it is to get high-quality questions from analysts. This is one of the most effective ways to use social media for investor relations. But to do this, we also need to understand the motivations of the people on an earnings call. All too often, a sell-side analyst will ask a question (even a bad one) just to get their name on the SeekingAlpha transcript. Between sell-side self-promoters and buy-side analysts playing it close to the vest to protect their strategies, maximizing question quality can be tricky.
Fortunately, people think out loud on the internet. IR Smartt are big proponents of using real-time sources of questions such as Twitter and StockTwits to do pre-call research. These channels are generally more effective when a company has cultivated an audience in advance through a dedicate social engagement program but it isn’t strictly necessary. There is plenty of buzz out there if you know how to look for it.
And rest assured: investors and analysts are looking for it. Crowdsourcing of opinions has long been a staple of the investment world. Its most recent incarnation is called Estimize, where amateur analysts submit earnings predictions. Estimze’s wisdom-of-the-crowds estimates are reliably more accurate than traditional Wall St. estimates.
From their most recent research: ‘for the 91 companies that have reported from our coverage universe, Estimize has been more accurate 63% of the time compared to Wall Street on both revenue and EPS estimates combined, 64% more accurate on EPS alone, and 62% more accurate on revenues alone.’
Estimize users don’t exist in a vacuum. The insight and interest that they display often make for intelligent call questions. Vitally, these people are taking an active online interest in a company’s earnings periods. They’re not difficult to reach, and are commonly expressing their opinions and insights in public places. A company who cares to can familiarize themselves with common threads, and even invite relevant and interesting parties to participate in the call.
As we close, it’s important to draw a distinction between innovation and the appearance of innovation. Companies looking for a change, and looking to show that they’re changing the way they operate, don’t have much to lose from well-executed overt changes to the way they operate their earnings calls. The same goes for companies who want to project a culture of innovation. So long as the new format is purposeful and comes with utility, it won’t come off as a gimmick.
Many companies have an established earnings call pattern that works well. These companies’ investors and analysts have come to expect the calls to go a certain way, and a change would needlessly raise eyebrows, no matter how much better it makes the call. When an IRO of an established company wants to try something different, it’s best worked in subtly.
Checklists are seldom talked about in IR, but they have a huge amount of value. Using a checklist is a guaranteed way to increase the minimum standards of a team. If our worst case outcome is the industry standard, then we have a great base to improve the quality of our earnings call an innovate beyond it. The audio earnings call checklist below will help you do this.